BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM : PRASHANT SARAN, WHOLE TIME MEMBER ORDER

Transcription

1 WTM/PS/49/CFD/DEC/2014 BEFORE THE SECURITIES AND EXCHANGE BOARD OF INDIA CORAM : PRASHANT SARAN, WHOLE TIME MEMBER ORDER Under sections 11(1), 11(2)(j), 11(4) and 11B of the Securities and Exchange Board of India Act, 1992 read with section 12A of the Securities Contracts (Regulation) Act, 1956 in the matter of non-compliance with the requirement of minimum public shareholding by listed companies In respect of U.P. Hotels Limited 1. Securities and Exchange Board of India (hereinafter referred to as 'SEBI') had passed an interim order dated June 04, 2013 (hereinafter referred to as 'the interim order') with respect to 105 listed companies who did not comply with the Minimum Public Shareholding ('MPS') norms as stipulated under rules 19(2)(b) and 19A of the Securities Contracts (Regulation) Rules, 1957 (hereinafter referred to as 'SCRR') within the due date i.e., June 03, The interim order was passed without prejudice to the right of SEBI to take any other action, against the non-compliant companies, their promoters and/ or directors or issuing such directions in accordance with law. The interim order was to be treated as a show cause notice by those companies for action contemplated in paragraph 18 thereof. 2. U.P. Hotels Limited (hereinafter referred to as 'the Company') is one such company against whom the interim order was passed. The equity shares of the Company are listed on the Bombay Stock Exchange Limited ('BSE'). 3. Mr. Apurv Kumar, Joint Managing Director of the Company vide his letter dated June 25, 2013, replied to the interim order. Before proceeding further with the matter, personal hearing was scheduled on July 04, In the meantime, Joint Managing Director of the Company namely Mr. Rupak Gupta vide his letter dated June 27, 2014 submitted that he represents Group 'C' of the promoter group which comprises of him and his mother, together holding 15.22% shares in the Company. It was also submitted by him that the issues at hand have been caused on account of the litigation pursued by the members of Group 'B', who are acting in concert with the members of Group 'D'. Citing the principles Page 1 of 12

2 of equity and fairness in the circumstances of inter se promoter group strife, he requested that an adequate hearing is provided to him and Ms. Supriya Gupta. It was also submitted by him that 'in the matter of representation of the Company for the MPS requirement and actions attendant thereto, both the Joint Managing Directors are to cooperate'. Mr. Rupak Gupta took steps on behalf of the Company and the legal team already assisting the Company since May 2013 with respect to the compliance of the MPS requirement and sought the co-operation of Mr. Apurv Kumar, towards this end. However, Mr. Apurv Kumar engaged a new legal team for the Company, in exclusion of the participation of Mr. Rupak Gupta. Further, it was said that the legal team so engaged by Mr. Apurv Kumar cannot validly represent the Company. 4. On the date fixed for the personal hearing i.e. July 04, 2014, both the Joint Managing Directors i.e. Mr. Apurva Kumar and Mr. Rupak Gupta of the Company appeared along with their respective legal teams. Mr. Apurv Kumar, Joint Managing Director of the Company appeared along with Mr. Sidharth Ghatak, Company Secretary; Mr. N.K. Sethi, Senior Counsel; Mr. Jaspreet Singh, Counsel; Mr. Ashok Agarwal, CEO and Ms. Rekha Bagry, Executive Director, Pricewaterhouse Coopers and made submissions. Mr. Rohit A. Kapadia, Senior Advocate appeared along with Mr. Manoj Kumar and Mr. Shantanu, both advocates from Hammurabi & Soloman, made submissions on behalf of the Company and also filed written submissions which were taken on record. Mr. Rupak Gupta, Joint Managing Director of the Company also appeared for the personal hearing along with Mr. J.J. Bhatt, Senior Advocate; Mr. Arun Kathpalia, Advocate and Ms. Misha, Advocate and filed an application for intervention on behalf of himself and Ms. Supriya Gupta, which was taken on record. On conclusion of the personal hearing, 15 days time was granted to submit the written submissions, if any. 5. The advocates for the Company i.e. Hammurabi & Solomon vide their letter dated July 18, 2014, stated that the written submission filed during the course of personal hearing be treated as the written submissions. Mr. Rupak Gupta and Ms. Supriya Gupta filed the Page 2 of 12

3 written submissions on July 18, Mr. Apurv Kumar also filed written submissions vide his letter dated July 21, All such written submissions were taken on record. 6. The submissions made by the Company and its Joint Managing Directors, in brief, are as under: i. The Company's submissions made vide letter dated July 04, 2014 in brief are as under: a. It is carrying on the business of running and managing hotels. The promoters hold 88.38% share of the Company. The Company in order to comply with the MPS norms had to increase the public shareholding to 25% on or before June 3, b. The Board of Directors of the Company in their meeting held on May 12, 2013, had decided to take all necessary steps in order to ensure compliance with the listing requirement and retain the status of the listed company. In the meantime, on May 24, 2013, an application was filed before the Learned Court of Additional Civil Judge (hereinafter referred to as 'Civil Court') by an official of the Company, requesting permission to comply with the MPS requirement, without the knowledge of the Company. As a result of the notice issued by the Learned Civil Court on such application, the Company had to follow due process and seek permission of the Learned Civil Court for complying with the MPS requirements. c. Thereafter, the Board of Directors of the Company on May 27, 2013, in order to comply with the MPS requirements resolved to issue bonus shares only to the public shareholders subject to the consent of the members in the general meeting and orders in the ongoing proceedings before the Hon'ble High Court of Judicature at Allahabad, Lucknow Bench and the Court of Additional Civil Judge (Sr. Division), Lucknow. In the said Board meeting, it was also resolved that a sum of 96,39,470 be captilaized from the necessary reserves and be distributed amongst the equity (public) shareholders of the Company, excluding the promoter and promoter group entities of the Company. In the proportion of 31 equity shares for every 20 equity shares held by the public shareholders. The issuance of the bonus shares was subsequently approved by the shareholder of the Company in the Extra Ordinary General Meeting (hereinafter referred to as 'EOGM') held on July 23, d. In the meantime, the Company came to know that one of the promoters viz., Mr. Apurv Kumar also the Joint Managing Director of the Company had written a letter to SEBI dated September 13, 2013, wherein he sought a confirmation from SEBI, whether in a case where the promoter/ promoter group did not forgo their bonus entitlement, Page 3 of 12

4 will the Company be entitled to issue bonus shares to such promoter/ promoter group. To this, SEBI has replied by saying that the Company will be required to issue bonus shares to all the shareholders who have not given their consent to forgo their entitlement to receive the bonus shares. Thereafter, the Company was approached by some shareholders/ entities belonging to the promoter group aggregating to about 51.50% of the shareholding of the Company for issuing bonus shares to them also. e. It has been said that even if, the entire available free reserves of the Company are utilised to issue the bonus shares to the intended recipients, the bonus issue would not result in the compliance of the MPS requirements. Therefore, it cannot be implemented in view of the actions of promoters seeking bonus shares. f. The bonus issue route was the last and only possible option to comply with the MPS requirement which also now stands completely derailed. g. The total number of shares of the Company traded in the past six months are far lower than even the threshold of 2% of its market capital i.e. 1,08,000 shares. In view of the thin trading in the Company's shares, there is no particular benefit which is available to the shareholders of the Company by continuing with the listing of the shares. It has also been said that the public shareholders are finding it difficult to dispose off their shareholding, as a result of disputes and litigations inter se amongst the promoters. ii. Mr. Rupak Gupta, Joint Managing Director of the Company, vide letter dated June 27, 2014 and July 18, 2014 submitted as under: a. Mr. Rupak Gupta and Ms. Supriya Gupta are members of Group 'C' (one of the promoter group of the Company). The promoter group currently holds 88.39% shares of the Company and 11.61% shares are held by the public. The above promoter group holding is directly and indirectly held in the following proportion i.e. Group A: 20%, Group B: 40%, Group C: 30% and Group D: 10%. b. Initially, no consensus could be arrived for complying with the MPS requirement, thus, no effective decision could be taken up on the matter. On February 13, 2013, it was unanimously resolved to voluntarily delist the Company and a consultant was appointed for rendering the advisory services in connection with proposed delisting. However, while further requisite steps towards delisting of shares were to be taken, the Board of the Company reconsidered the issue in the meeting of May 12, 2013 and decided that steps would be taken to ensure the continued listing of the Company's share. Page 4 of 12

5 c. Thereafter, in the Board meeting held on May 27, 2013, it was resolved that bonus shares be issued exclusively to the public to the exclusion of the promoters and promoter group to increase the shareholding of the public shareholders to not less than 25% of the paid up share capital of the Company. Mr. Rupak Gupta then informed SEBI of the decision to issue bonus shares subject to the approval of the members and the status quo order passed by the learned Civil Court. d. In the meantime, the CMD of the Company, Mr. Birendra Kumar and another director namely Mr. Arvind Kumar, dragged the Company to a litigation based on an otherwise inchoate settlement arrived at by some family members of the Gupta family in the year 1998 and to which the Company was not a signatory. The civil suit before the learned Civil Court is filed by Group 'B' members. Group 'C' and 'A' promoter group members took steps to seek vacation of the ex-parte ad-interim order. However, on March 20, 2013, the Civil Court confirmed the interim injunction dated December 7, 2012 and inter alia directed that status quo be maintained. In April 2013, the members of promoter Group 'C' and 'A' preferred an appeal against the order of Civil Court, Lucknow. However, no interim relief was granted. In the meantime, a vague application was moved in the civil proceedings by an employee of the Company (a DGM) purportedly on behalf of the Company seeking clarification of the interim order. e. Mr. Rupak Gupta, then took an initiative to get a draft of the application prepared for filing with Hon'ble High Court of Judicature at Allahabad, Lucknow Bench and forwarded the same to Mr. Apurv Kumar who had neither commented upon nor signed the said application. Given the urgency, Mr. Rupak Gupta mooted a circular dated July 13, 2013, in modification of the earlier resolution dated May 27, 2013, seeking exclusive authorisation to file the application for seeking appropriate direction from the Hon'ble High Court of Judicature at Allahabad, Lucknow Bench for compliance with the MPS requirement. In the meantime, Mr. Birendra Kumar, CMD of the Company objected to the circular resolution authorising only Mr. Rupak Gupta to file appropriate application. Mr. Rupak Gupta in order to obviate any confusion on account of the communication from Mr. Birendra Kumar, moved another resolution on July 14, 2013 in favour of Mr. Rupak Gupta. This resolution was passed through circulation on July 15, On clearing the said obstruction and pursuant to seeking of exclusive authority, Mr. Rupak Gupta promptly filed an application on behalf of the Company before the Hon'ble High Page 5 of 12

6 Court, seeking permission to take steps from compliance with MPS by issuance of bonus shares. f. The written consent of 80.77% of the promoters was duly obtained to waive their rights to bonus shares. However, at the EOGM dated July 23, 2013, about 28.28% promoter shareholders who had earlier given their consent withdrew the same and as a result the resolution at the EGM was passed with 68.60% majority. g. In the meanwhile, the members of Group 'B' filed an application with the learned Civil Court, inter alia challenging the circular resolutions dated July 13, 2013 and July 15, Such application was allowed partly and the circular resolutions were prohibited vide order dated August 14, Mr. Rupak Gupta then filed an application before the Hon'ble High Court for seeking permission to comply with the MPS norms. The Hon'ble High Court on hearing directed that the order dated August 14, 2013, passed by the learned Civil Court shall remain in abeyance. The Hon'ble High Court also directed that steps for compliance with MPS requirements be taken by the Company Secretary and the Joint Managing Directors would work together to safeguard the interest of the Company. Due to certain discrepancy about the date of resolution, Mr. Rupak Gupta again approached the Hon'ble High Court for clarification. The order was eventually clarified on April 29, 2014, paving way for the Company to take final steps for issuance of bonus shares for compliance of MPS. However, a lot of precious time was lost in the process. h. In the meantime, certain promoters of the Company withdrew their consent for waiving their rights to bonus shares, due to which the entire purpose of issuance of bonus shares as a method of compliance with MPS requirement stands frustrated. In view of the same, Mr. Rupak Gupta was constrained to move a circular resolution dated May 08, 2014, mooting an option of de-listing of the Company, which was later withdrawn. i. It has been said that members of Groups B and D, have ensured that MPS compliance is not achieved through issuance of bonus shares. Instead of co-operating with Mr. Rupak Gupta in forming consensus over de-listing, Mr. Apurva Kumar accused him of being in contempt of order of the Hon'ble High Court. j. Despite proactive and initiative driven steps taken by Mr. Rupak Gupta and Ms. Supriya Gupta, the requirement of meeting with MPS by issuing bonus shares to the members of the public, excluding promoters and promoter group has been stalled and made complicated. Mr. Rupak Gupta and Ms. Supriya Gupta cannot be held liable for the Page 6 of 12

7 failure of the Company to meet with MPS requirements. The litigation where the company was unnecessarily dragged as a party was not of the doing /making of the persons on whose behalf these submissions are being made. k. The shares of the Company are thinly traded at the stock exchange and the interest of the investor is not harmed in any manner nor is the securities market adversely impacted by the pending compliance of MPS. There has been no wilful non-compliance by the Company, which is merely a victim of its circumstances and unfortunate conflicting interests of promoters. l. Mr. Rupak Gupta was not provided with an opportunity to hear the submissions made by Mr. Apurv Kumar, rebut, meet or clarify contextually any prejudicial and self serving submissions that may have been made during the course of personal hearing on July 04, No conclusion/ inferences against the makers of these submissions be drawn on the basis of the same. iii. Mr. Apurv Kumar, Joint Managing Director of the Company, vide letter dated June 25, 2013 and July 21, 2014 submitted as under: a. The promoters of the Company are members of one family. The pedigree of the promoters traces back to Sri Das Ji who along with his three sons set up the business in the year By the passage of time, the partnerships were converted to private limited and then to limited companies. The Company is one of the branches which sprouted out of the main business. In the year 1961, in order to preserve the family amity, the responsibilities to run the business was divided amongst the various branches and the business interests were divided into three Groups i.e. A, B and C in the ratio of 30:40:30, each group representing one son of Sri Das Ji. The shareholding pattern in the group companies were brought in tandem with this ratio. The same was later altered to 20:40:30:10 when Mr. Ravi Gupta and Mr. Rakesh Gupta of Group A, decided to split and as a result a Group D was carved out. With the passage of time, in order to consolidate and effectively manage the hotel division and the properties, a Memorandum of Understanding (MoU)dated August 05, 1998 was arrived at between the various groups. b. In the interregnum, disputes arose between the promoters of the Company relating to the violation of the terms of MoU and the matter relating to the business interests of various promoter group became 'sub judice' before the competent Court at Lucknow and Page 7 of 12

8 a restraint order dated December 07, 2012 was passed, wherein the Company has also been arrayed as a party. c. In the meanwhile, the Board of Directors of the Company in the meeting held on February 13, 2013, decided to get the Company voluntarily delisted from the BSE. However, in the above said litigation, the Learned Civil Court vide its order dated March 20, 2013, directed the parties to maintain status quo in respect of all the properties which are the subject matter of such litigation. In this backdrop, the parties in the suit also included the Company, therefore it was bound by the Court orders. d. The Company in order to comply with MPS requirements, initially mooted, the route of compulsory de-listing. This order was challenged by Mr. Rupak Gupta (the members of Group C), another Joint Managing Director of the Company before the Hon'ble High Court. However, the Hon'ble Court refused to stay the operation of the order dated March 20, e. In the meantime, Mr. Rupak Gupta changed his stand of voluntarily delisting of the equity shares of the Company as confirmed in the Board meeting dated February 13, 2013 and proposed to adopt the method of issue of 'bonus issue' for complying with the MPS requirements. He and Mr. Rupak Gupta were authorized to take necessary steps to comply with Clause 40 A of the listing agreement. In the meeting of Board of Director dated May 27, 2013, it was inter alia decided that as the matter was sub judice, only after the Court order some clear decision be taken. f. Later, the Company moved an application dated May 24, 2013, before the Learned Civil Court seeking clarification/ modification of the order dated March 20, 2013, to the effect that the same shall not prevent it from making statutory compliance, which remained pending. In the meantime, during the month of April 2013, members of Group 'C' and Group 'A' preferred two appeals before the Hon'ble High Court against the order dated March 20, However, the Hon'ble Court did not stay the said order. g. Mr. Rupak Gupta in haste without seeking the concurrence of the other members of the Board and Chairman, sent a communication to BSE and SEBI about issuance of the bonus shares to the public only vide intimation dated May 27, 2013 and May 28, 2013 while relying upon un-ratified/ incorrect minutes of the Board meetings. It was not even decided that the promoters shall forego their entitlement to equity shares. Page 8 of 12

9 h. Thereafter, the Learned Civil Court while considering the applications filed by the members of Group 'B', stayed the effect of the resolution dated July 14, 2013 vide order dated August 14, The same was challenged by the members of Group 'C' and 'A' by means of two separate appeals. The Hon'ble High Court vide order dated September 09, 2013, directed that the order dated August 14, 2013, shall remain in abeyance, however, the issue of compliance of Clause 40A of the Listing Agreement was not discussed by the Hon'ble Court. Hon'ble Court only observed that the parties should co-operate for the purposes of implementation of resolution dated February 13, i. On account of the discrepancy in the date of resolution, applications were filed for modification/ correction of the order by the members of Group 'C' and Group 'D'. The applications were allowed on April 29, j. Mr. Apurv Kumar, then sought clarification from SEBI, on the position, where, some members/ promoters who did not grant their consent for waiving of their right to subscribe to the bonus shares. On receipt of the clarification, Mr. Apurv Kumar prevailed upon the Company Secretary, being the compliance officer, to ensure that bonus shares be issued to achieve the MPS requirement including to such promoters/ promoter groups, who had not waived their right, along with the members of the public who were entitled to it. k. Therefore, as far as Mr. Apurv Kumar, members of the Group 'B' and 'D' and the Company are concerned there has been no fault for non compliance rather active steps were being taken to ensure that the bonus shares be issued. All necessary steps befitting for compliance of the Court order as well as of Clause 40A of the Listing Agreement have been taken. Certain members of Group 'A' and 'C' who were not willing to abide by the order of the Hon'ble High Court dated April 29, 2014, whereby it was clarified that the compliance in respect of Clause 40A of the Listing Agreement ought to be done in terms of the resolution dated May 27, 2013 i.e. through issuance of bonus shares. Mr. Apurv Kumar then issued a legal notice dated May 31, 2014 to one Mr. Sushil Kumar of Group 'A' and Mr. Rupak Gupta of Group 'C'. Despite the legal notice, compliance could not be done because of resistance of Group 'A' and 'C'. Mr. Apurv Kumar then preferred contempt petition dated July 01, 2014 before the Hon'ble High Court, wherein notice has been issued to such persons. l. The Company has made earnest, diligent and sincere efforts in complying with the MPS requirement, however, on account of the proceedings before the Court and orders Page 9 of 12

10 passed such compliance was not feasible as it would have amounted to disobedience of the order passed by the Court. m. The compliance of Clause 40 A of the Listing Agreement is not only a SEBI direction anymore but is also a part of the Hon'ble Court order dated April 29, 2014, hence the compliance can also be enforced through the Court of law for which necessary measures are being taken. It has been requested to discharge the SCN, penalties and proposed penalties in so far as the directors of Group B and D are concerned. 7. From the above, I note that the Company and its two Joint Managing Directors have given their versions as to why the Company was not able to comply with the MPS requirement. The two Joint Managing Directors vide their respective submissions have tried to explain that there has been no fault on their side and they cannot be held liable for the failure of the Company to meet with the MPS requirements. One of the Joint Managing Directors, Mr. Apurva Kumar also submitted that the Company may be kept under 'the sub-judice category'. 8. I have considered the submissions made by the Company and its Joint Managing Directors and other material available on record. The interim order was issued against the Company as it was non-compliant with the provisions of Rule 19A of the SCRR and Clause 40A of the Listing Agreement read with Section 21 of the Securities Contract (Regulation) Act, 1956 ('SCRA'), having not maintained the minimum level (of 25%) of public shareholding as of June 03, 2013 (the time line before which such compliance was to be achieved). Admittedly, this contravention still continues. The amended provisions of Rules 19A of the SCRR came into force with effect from June 04, 2010, offering a time period of three years (i.e., on or before June 03, 2013) for a listed company to maintain public shareholding of atleast 25%. I note that the Company had not taken any step to comply with the MPS requirements except placing the issue for consideration in its Board meetings. It has been submitted by Mr. Rupak Gupta, one of the Joint Managing Directors that initially no consensus could be arrived at amongst the Board members as to the way forward for compliance and therefore no effective decisions could be taken on the matter. I note that it was only on February 13, 2013, that a resolution was passed to voluntarily delist the Company. However, this decision was reconsidered in the meeting of May 12, 2013 and in the Board meeting dated May 27, 2013, wherein it was resolved that bonus shares be issued exclusively to the public. Page 10 of 12

11 9. The Company and the Joint Managing Directors in their submissions have argued that they were not able to comply with the MPS norms due to the restraint order dated December 07, 2012 and status quo order dated March 20, 2013 passed by the Learned Civil Court. However, it is to be noted that prior to the orders of Learned Civil Court also the Company had sufficient time to comply with the MPS norms. Further, the Hon'ble High Court has also vide its order dated September 09, 2013, inter alia said that ' in case Apurv Kumar is not cooperating as per Resolution dated February 13, 2013, the Company Secretary is authorized to take necessary steps as required under Securities Contract Regulation Rules, 1957 read with Clause 40 A of the Listing Agreement and SEBI directives applicable to public listed companies '. Considerable time has elapsed, since the order of Hon'ble High Court, however, the Company is yet to comply with the MPS norms. 10. It is to be noted that the relevant statute does not provide for exemption/ relaxation of such continuous listing requirements. The same also does not provide any category by the name of 'sub-judice category' as submitted by one of the Joint Managing Directors, Mr. Apurva Kumar. From the submissions and the records brought before me, there appears to be no order directing status quo of the shareholding levels in the Company. On the contrary as stated above, the Hon'ble High Court has directed the Company to take necessary steps towards the MPS compliance. I also note that the Hon'ble High Court, vide its order dated May 30, 2014 has inter alia stated that " status quo shall be maintained amongst the parties with regard to the management of assets only, as granted by the trial Court vide order dated March 20, 2013." The Hon'ble High Court also directed the Learned Trial Court to expedite the hearing of the regular Suit No of I note that as long as the Company remains listed, it should comply with the applicable law including the continuous listing requirement stipulated under Rule 19A of the SCRR. Considering the fact that the Company has not complied with the MPS requirements till date in breach of Rule 19A of the SCRR and Clause 40 A of the Listing Agreement read with Section 21 of the SCRA and such non-compliance being continuous in nature, it becomes necessary for SEBI, to confirm the directions issued vide the interim order against the Company, its directors and promoters/promoter group. Further, for proper regulation of the securities market and the continuous nature of the violations committed by the Page 11 of 12

12 Company, SEBI may also initiate other action, as appropriate in law, against the Company, its directors and promoters and promoter group. 12. Accordingly, I, in exercise of the powers conferred upon me under Section 19 of the Securities and Exchange Board of India Act, 1992 read with Sections 11(1), 11(2)(j), 11(4) and 11B thereof and Section 12A of the Securities Contracts (Regulation) Act, 1956, hereby confirm the directions issued vide the interim order dated June 04, 2013 against the company, U.P. Hotels Limited, its directors, promoters/ promoter group. 13. This Order shall remain in force till further directions. 14. Copy of this Order shall be served on the stock exchanges and depositories for their information and necessary action. DATE: December 02, 2014 PLACE: Mumbai PRASHANT SARAN WHOLE TIME MEMBER SECURITIES AND EXCHANGE BOARD OF INDIA Page 12 of 12